Select Committee on Defence Fourth Report




49. Trends are converging to dictate a significantly different approach to meeting the MoD's aviation repair and overhaul requirements. The MoD has fewer aircraft to maintain after a series of post-Cold War fleet reductions, most recently in the Strategic Defence Review. Engines and avionics need less frequent servicing and repair, which means that repair facilities—in the MoD and outside—are not fully loaded. Competition for available work has therefore become more intense, in a market where a more flexible and integrated approach to aviation maintenance is needed to win contracts. With defence budgets now generally steady, it is right that the MoD, like its civil counterparts, should seek to take advantage of these new more favourable conditions, to generate savings for reinvestment in front-line equipment.

50. Although allowing DARA to operate on a more commercial footing should help the MoD to reap these benefits, there are important safeguards that the Department will have to keep in place. First, while we accept that the strategic requirement for maintaining in-house repair capabilities is not as high as it was in the Cold War, there is still a need for assured access to repair capabilities and a capacity for surge workloads in times of crisis (as the Kosovo campaign demonstrated). That continuing requirement must be protected in DARA. Second, partnerships with private sector repair firms and original equipment manufacturers must not be allowed to remove the MoD's ability to run effective competitions for its repair and overhaul requirements.

51. DARA's rationalisation plans will help put it on the more efficient foundation needed to be able to compete with private industry. They should proceed only after thorough investment appraisal and consultation with those affected by any changes. They should not be driven by an overriding aim of reducing the Agency's capabilities. Staff potentially affected by the rationalisations are understandably anxious about their future. We therefore welcome the MoD's assurances that the already decided relocation of engine repair work from St Athan to Fleetlands will not entail compulsory redundancies, and its expectation that any manpower reductions as a result of a relocation of St Athan's aircraft work will be achieved through natural wastage. The same approach should be used for any other rationalisations still under consideration, and a concerted effort will be needed to carry DARA's staff along with the changes in prospect.

52. We welcome the management focus now being given to improving unacceptably long turnround times for aviation repairs. DARA will no doubt have to provide satisfactory performance in this area to win work once it is no longer protected by its guaranteed MoD order book. The Agency's principal targets as a trading fund, however, will no longer include standards for turnround times (paragraph 42). The MoD should therefore introduce alternative measures to monitor DARA's ability to control the Agency's progress in improving turnaround times. Any future poor performance will be felt in the unavailability of front-line aircraft.

53. It is not just those of cynical disposition who might be wary of the MoD's motives in creating trading funds, seeing it as a possible stepping stone to privatisation or as a way of reducing expenditure on the capability in question. The experience of the Defence Evaluation and Research Agency, three-quarters of which is to be transformed from a successful trading fund into a private company, might be held up as a warning. There is room for more optimism, however, in the case of DARA. The Department does indeed anticipate reductions in its aviation repair expenditure[117] but the scope for these will no doubt be limited by the readily discernible impact on aircraft availability (the effect of reductions in defence research expenditure, on the other hand, often only become apparent decades later). As for privatisation, we have heard evidence from the MoD in this inquiry that this is not on the agenda. It should remain off it.

54. The Agency's Chief Executive told us that—

    The benefits of a trading fund are a significantly greater discipline compared to an on-Vote agency, significant increased transparency of prices, a very much closer and direct relationship between customer and supplier ... We will ...have the freedom to invest profits into the business, to be able to provide and upgrade facilities for the long-term. We come off the system of annuality which has an artificiality that does not help when you are looking at capital projects. There will be a much sharper performance focus and that will be matched by new key targets which will measure our performance much more robustly. Very importantly, we will have pay and grading freedoms within Treasury limits, which will enable us to recruit and retain ... high quality people by paying market rates of pay — something that we have not been able to do within the constraints of the central MoD system. Also important is the access to wider markets. We will be free to invest in those [markets], or bid into them. As a trading fund, we will be able to enter into joint venture arrangements with industrial partners.[118]

The MoD sees benefits from converting DARA to a trading fund, which will develop a competitive alternative to its commercial sources of repair work, saving money for other more pressing defence requirements. For DARA, the change of status will challenge its previously sheltered relationship with the Department, but it will, we are persuaded, also bring benefits to the Agency. But if as a result DARA cannot deliver reduced prices and better performance, the MoD might be increasingly driven to place more of its repair work directly with industry, which would effectively leave DARA to wither on the vine. The Agency should become a trading fund on 1 April 2001, as planned. It should continue to have that status for the foreseeable future.

117  Ev p18, para A80 Back

118  Q51 Back

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